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Date Published: 1 Jul 2014

The reasons for the sad ending to the Relative Value Arbitrage Fund, for both investors and advisors, are evident from this, the first determination by the Ombud on the Herman Pretorius saga.

A client, who invested R500 000 in 2010, complained to the Ombud after losing all his savings when the mastermind behind the fund reportedly committed suicide.

The Ombud quotes the following “important points” from the complaint:

‘I had trust in the respondent as he was correctly registered as a certified financial planner. He was a member of the FPI. His company was FSB licensed. I would never have invested my money in any investment platform by not doing it through a registered financial services provider/certified financial planner. The fact that he is a registered financial services provider makes it certain in my mind that whatever investment platform he would be investing my money in would be:

legal

correctly registered

have all the necessary due diligence performed by himself

the fund manager (of RVAF) would be FSB licensed

there would be third-party verification of returns

there would be valid financial statements

the fund would be correctly audited

This, I understand, is not the case at all. I am dismayed that none of the above 7 points were fulfilled and I declare that the respondents acted unethically by investing my money in this “hedge fund”. I would never have invested a cent of my money into this fund had I known this information’ (own emphasis).

The Ombud then proceeds to dissect the evidence in terms of the legal obligations of the advisor, including the following:

The duty to identify the client’s needs

Disclosures in terms of section 4 and 5 of the Code

Information on the product supplier

The Code of Conduct for Discretionary Financial Services Providers

Risk and hedge fund strategies disclosure as required by the discretionary code and

Authorisation to conduct business as a financial services provider

Having dealt at great length with all of the above, the Ombud concludes:

“There are so many areas where the respondent was clearly remiss and in direct contravention of the FAIS Act that it is difficult to recap without repeating all that has already been discussed. At its simplest, had the respondent just requested a set of properly audited financials, the scam would have been revealed. This would have been part of basic due diligence. Yet not only was this (sic) most elementary of steps clearly omitted, but similarly, deficiencies are evident in the complete lack of any form of proper due diligence into the investment vehicle, underlying investments or their structure.”

She quotes from the ground-breaking Durr vs ABSA Bank Ltd and Another 1997 (3) SA 448 (SCA), case which states:

“The important issue is that even if the adviser himself does not have the personal competence to make the enquiries, I believe it is incumbent upon him to harness whatever resources are available to him or if necessary to ask for professional, legal or accounting opinion before committing his client’s funds to such an investment”.

Concerning the respondent’s obligations as a member of a professional body, she states:

“The Code of Ethics requires that the 2nd respondent undertake to act in a manner that displays exemplary professional conduct and maintain the abilities, skills and knowledge necessary to provide professional services competently. In short, the 2nd respondent was certified to a standard above and beyond that of the average financial adviser and must be held to this standard.”

A thorough reading of this determination is highly recommended to all investment advisors. In particular, the views of the Ombud on due diligence will clarify an aspect which is still very murky for many of us.

In Thursday’s Moonstone Monitor we will discuss the Ombud’s view on why the FSB failed to identify problems with the RAVF during on-site visits, which is also discussed in this determination.